Binary Options Lexicon: What is Economic Policy?
Definition: Economic policy refers to interventions by public authorities, whether it’s the State, the central bank or local administrations (local authorities), with the objective to improve the economic activity of the country.
The objectives: For this reason, public powers implement objectives to facilitate economic growth by setting forecasts in order to achieve high growth.
The goal of economic policy is generally to combat unemployment with the aim of creating full employment through direct or indirect job creation. There are two kinds of employment policies: Active policies to increase job levels in the economy, and passive policies, whose goal is to establish reasonable social treatment of unemployment.
Inflation control: The fight against inflation is also a policy goal for public decision makers, who seek to reduce uncertainty for businesses and to maintain household purchasing power. For this reason, a European framework was implemented involving the European Union member countries. Through the adoption of the Euro, the member States must adhere to criteria defined within the Maastricht Treaty. These criteria contain, most notably, a requirement that inflation that must not exceed 1.5% of the three member States with the best results.
Economic policy also has a goal to encourage competition by ensuring equilibrium when considering external accounts: This is external equilibrium.
Economists consider two types of economic policy:
Cyclical policy and structural policy.
Cyclical policy: A cyclical policy is a government’s method to establish short-term policy in the economy. Structural policy is intended to ensure economic stability and to reverse a risky situation. For these reason, structural policies are in most cases counter cyclical, which means they counteract a phase of the economic cycle, and are defined as such:
– Stimulus policies, which are called “expansionary policies” during recessions. They can be policies to increase consumption, for example, or those that implement large-scale public works projects.
– Austerity policies aim to control inflation and restore external equilibrium, and can be policies such as wage freezes.
Structural policy: In contrast to cyclical policies, structural policies are intended to be effective over the long term and seek to modify, in depth, social and economic structures. Pension reform is one such example.
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